Does Garden Silk Mills Limited (NSE:GARDENSILK) Fall With The Market?

Simply Wall St
April 20, 2018

If you are looking to invest in Garden Silk Mills Limited’s (NSEI:GARDENSILK), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Generally, an investor should consider two types of risk that impact the market value of GARDENSILK. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

What is GARDENSILK’s market risk?

Garden Silk Mills’s beta of 0.91 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. GARDENSILK’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns. NSEI:GARDENSILK Income Statement Apr 20th 18

Does GARDENSILK’s size and industry impact the expected beta?

With a market cap of ₹1.54B, GARDENSILK falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, GARDENSILK also operates in the luxury industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the luxury industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both GARDENSILK’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is GARDENSILK’s cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test GARDENSILK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. GARDENSILK’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect GARDENSILK to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts GARDENSILK’s current beta value which indicates a below-average volatility.

What this means for you:

GARDENSILK may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as GARDENSILK is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether GARDENSILK is a good investment for you, we also need to consider important company-specific fundamentals such as Garden Silk Mills’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

Financial Health: Is GARDENSILK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

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